European banks bailed out as crisis spreads

Tuesday

Sep 30, 2008 at 12:01 AM

LONDON — European governments announced a flurry of bank bailouts from Germany to Iceland on Monday, but the rescue deals only heightened fears that the contagion from the U.S. credit crisis has much further to spread before the financial system recovers.

JANE WARDELL

LONDON — European governments announced a flurry of bank bailouts from Germany to Iceland on Monday, but the rescue deals only heightened fears that the contagion from the U.S. credit crisis has much further to spread before the financial system recovers.

European shares fell heavily and money markets remained frozen with banks refusing to lend to each other for all but the shortest periods amid concern that a planned U.S. government $700 billion bailout package would not be enough to stem the crisis. A few hours later, the U.S. House defeated the rescue package by a vote of 228-205.

"In the near term, it will be the weak ones that will be picked off," Global Insight chief European economist Howard Archer said before the congressional vote of the expectation that more banks would collapse or need rescue.

"But, obviously, the more the turmoil and dislocation continues, the further this could spread," he added. "We live in vicious times."

The governments of Belgium, the Netherlands and Luxembourg took partial control late Sunday of struggling bank Fortis NV, while Britain seized control of mortgage lender Bradford & Bingley early Monday.

Additionally, the European Central Bank joined with the U.S. Federal Reserve in doubling the credit swap line that makes dollars made available to cash-hungry banks from $120 billion to $240 billion. The Bank of England doubled dollar availability to $80 billion, while other central banks offered smaller amounts.

Renate Brand, a banking analyst at SNS Securities, said that "it's getting difficult for a lot of banks at once now, because mistrust is so great and so widespread."

Ton Gietman from Petercam Securities said that markets had become so jittery that rumor and fact were being treated about the same.

"Take a company like Fortis, whose management swears high and low that they don't have any solvency problem — and it's still an open question whether they did or not — this market doesn't care," he said. "If you can't stop your share price from falling with anything you say, you have to take some action to reassure investors and depositors."

Analysts are closely watching Dexia, a French-Belgian specialist in lending to local governments that ran up huge losses in its U.S. operations. The bank had no comment on a report it was planning a rapid capital increase but said the board would meet Monday night to assess the situation.

Belgian Prime Minister Yves Leterme was quick to assure savers — and the stock market — that the government was ready to stand behind the bank if needed.

"We will take the necessary measures to guarantee the interests of all the savers, all the customers," he told reporters, describing the bank as very important to the Belgian economy.

He called a cabinet meeting Monday to discuss Dexia and told VRT news earlier in the day that the government had been talking to Dexia management for several days and its problems were "fundamentally different" from Fortis.

Notably, the Fortis bailout took place across national lines. For months, European officials have been concerned whether governments would work together in a crisis. In this case they did, with European Central Bank president Jean-Claude Trichet attending the negotiations in Brussels on the 11.2 billion euro ($16.4 billion) bailout package.

The three governments took a 49 percent stake in exchange and demanded Fortis sell the stake it had bought in ABN Amro a year ago for 24 billion euros — a move that many analysts believe started its troubles. However, they said some positive news was provided by the joint action taken by Belgium, the Netherlands and Luxembourg in agreeing.

"The ability of the euro area fiscal authorities to coordinate on a bailout for a bank with not-only strong cross-boundary operations, but indeed with a strong multinational (almost supranational) identity was untested until today," Willem Buiter, a professor at the London School of Economics and a former Bank of England policymaker, said in his blog on www.ft.com.

"They passed the test."

The government took over Bradford & Bingley's 50 billion pound ($91 billion) mortgage and loan books and paid out 18 billion pounds ($33 billion) to facilitate the sale of its savings business, including its entire retail branch network, to Spain's Banco Santander.

Britain earlier this year nationalized Northern Rock, but not until after the mortgage lender suffered a damaging run on its deposits by spooked customers. The government's desire to move quickly to avert any repeat was underscored by its swift action on Bradford & Bingley — a systematically unimportant buy-to-let lender that is around half the size of Northern Rock at its peak.

In Iceland, the government took control of Glitnir bank, the country's third largest, buying a 75 percent stake for 600 million euros ($878 million) in a move it said was to ensure broader market stability. Central Bank of Iceland chairman David Oddsson said that Glitnir, which has operations in 10 countries, would have collapsed if the authorities had not intervened.

In Germany, Hypo Real Estate Holding AG, the country's No. 2 commercial property lender, became the first German blue chip company to seek a bailout in the global financial crisis, securing a line of credit of up to 35 billion euros ($51.2 billion).

Despite the concerted attempt by European authorities to shore up confidence, stock markets tumbled in response to the series of measures — the London Stock Exchange FTSE 100 dropped 4.7 percent, Germany's DAX fell 3.7 percent and France's CAC 40 shed 4.6 percent.

"All banks are having difficulty with long term loans and short term financing. It's difficult to say which could be affected," said UniCredit economist Alexander Koch in Munich. "I see the problem flowing until late next year."

AP Business Writers George Frey in Frankfurt, Emily Flynn Vencat in London, Toby Sterling in Amsterdam and Matt Moore in Berlin contributed to this report.

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